The Gujarat High Court has held that GST authorities cannot reject a taxpayer’s refund claim for excess interest by ignoring a binding judicial precedent and mechanically relying on the prospective operation of the proviso to Rule 88B of the Central Goods and Services Tax (CGST) Rules, 2017.
Setting aside the refund rejection order, the bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati directed the department to refund the excess interest with statutory interest at 6% per annum, observing that the authorities had failed to apply the law already laid down by the High Court.
The bench quashed both the refund rejection order dated June 17, 2025, issued in Form GST RFD-06, and the recovery notice dated January 17, 2025. It further directed the respondents to process the refund within six weeks, failing which the amount would carry enhanced interest at 12% per annum for every week of delay. The Court also imposed costs of ₹5,000 on the department.
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The petitioner/assessee is engaged in the business of manufacturing and selling chewing tobacco, had filed belated GST returns for several tax periods, including July to September 2017, June 2020, and March to June 2021. Although the returns were filed late, the tax amounts had already been deposited into the Electronic Cash Ledger before the due date for filing returns for all periods except April 2021. Subsequently, during an audit, the department raised an objection regarding interest liability, following which the petitioner paid interest through Form GST DRC-03 on June 1, 2023.
Later, the department issued a notice demanding interest on account of delayed filing of returns. The petitioner responded by relying upon the Gujarat High Court’s earlier decision in Arya Cotton Industries v. Union of India, contending that interest could not be levied for the period during which the tax amount was already lying in the Electronic Cash Ledger. The petitioner thereafter filed a refund application for the excess interest paid. However, the refund application was rejected solely on the ground that the proviso inserted in Rule 88B of the CGST Rules with effect from July 10, 2024, was prospective and therefore inapplicable to earlier tax periods.
The principal question before the High Court was whether the GST authorities could deny refund of excess interest by refusing to apply the ratio laid down in Arya Cotton Industries merely because the proviso to Rule 88B was introduced subsequently with prospective effect.
The High Court observed that the refund claim had been rejected exclusively on the ground that the amendment to Rule 88B operated prospectively, without examining the petitioner’s entitlement in light of the binding decision in Arya Cotton Industries. The Bench noted that despite repeated references by the petitioner to the earlier judgment, the authorities completely ignored it while deciding the refund application.
Referring extensively to its earlier decision, the Court reiterated that once the tax amount is deposited into the Electronic Cash Ledger before the due date, such deposit is deemed to have been credited to the Government’s account. The subsequent debit from the Electronic Cash Ledger at the time of filing the return is merely an accounting adjustment and cannot be treated as delayed payment of tax for the purpose of charging interest. Interest under Section 50 of the CGST Act is compensatory in nature and cannot be converted into a penal levy by adopting a purely mechanical interpretation.
The Bench further noted that the proviso inserted in Rule 88B through Notification No. 12/2024 was introduced following the recommendations made in the 53rd GST Council Meeting and was in line with the legal position already declared by the Gujarat High Court in Arya Cotton Industries. Therefore, even if the amendment itself operated prospectively, the authorities remained bound to apply the ratio of the earlier judicial pronouncement while deciding pending refund claims.
Making strong observations against the tax authorities, the Court described the case as a “classic case of selective denial.” It observed that while the department acknowledged that the petitioner’s case was squarely covered by the judgment in Arya Cotton Industries, it nevertheless refused relief by taking shelter behind its own interpretation that the proviso to Rule 88B applied only prospectively.
According to the Court, the authorities ought to have processed the refund application by applying the binding precedent instead of adopting an alternative reasoning to reject the claim. The impugned order, the Bench held, was arbitrary and demonstrated complete non-application of mind despite the petitioner repeatedly drawing attention to the earlier judgment.
The Gujarat High Court quashed the refund rejection order dated June 17, 2025, as well as the recovery notice dated January 17, 2025. The Court directed the GST authorities to refund the excess interest amount together with statutory interest at the rate of 6% per annum.
The court ordered that the refund application be processed within six weeks, failing which the unpaid amount would carry additional interest at 12% per annum for every week of delay. Costs of ₹5,000 were also imposed on the department.
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